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Monday, August 02, 2004

It's always been assumed, by the United Nations as well as European and U.S. policymakers, that Saudi Arabia would be able to pump more of its oil to fulfill increasing world demand. The Saudis are pumping, at most, 9 million barrels a day now and have boasted that they could pump as much as 15 million barrels a day for the next 50 years. Indeed, Saudi leaders promised that they would start pumping more a few weeks ago.
But because world oil production hasn't increased since those promises were made, economists and energy users have wondered whether Saudi Arabia has elected, for political reasons, not to fulfill its vow.
Simmons says it's worse than that. Much like the biggest problem in the Enron fiasco was that analysts always trusted Enron managers' declarations about the strength of its financial assets, he says that the world has always taken Saudi Arabia at its word for its oil assets. He now believes that it cannot be trusted.
He notes that the six major oil fields in Saudi Arabia, all discovered between 1940 and 1967, produce about 95% of Saudi oil. The Saudis produce 10% of the world's oil from them at the world's lowest prices, and the Saudis are the only serious provider of "spare" capacity on the planet. A single field, Ghawar, which is the world's largest, was discovered in 1948 and produces up to 60% of the kingdom's total.
He believes that production at these mature fields has peaked. While that doesn't mean they'll run out tomorrow, they're becoming much harder and more expensive to exploit efficiently. It's like a person getting older and suffering from arterial sclerosis: They slow down and become increasingly less capable. The Saudis are now using intense water-injection techniques to improve production, he says, a technique that can ultimately lead to catastrophic pressure failure.
Aramco disputes his claim, but Simmons notes correctly that its principal answer comes down to an Enron-like "Trust me." There's no solid independent data source of Saudi oil production. "A lack of verified data leaves the world in the dark," he told the Hudson Institute.

That sheds some interesting light on the current upward trend of oil prices, to say the least.